SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1999 Commission File No 0-22290
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CENTURY CASINOS, INC.
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(Name of small business issuer in its charter)
Delaware 84-1271317
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
200 - 220 E. Bennett Ave., Cripple Creek, CO 80813
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(Address of principal executive offices) (Zip code)
(719) 689-9100
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(Issuer's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Exchange Act: None.
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value, and 1994 Class I Warrants
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(Title of classes)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
State the issuer's revenues for its most recent fiscal year: $23,584,171
The aggregate market value of the voting common stock held by non-affiliates of
the Registrant on February 25, 2000, was approximately $11,073,000 based upon
the average of the reported closing bid and asked price of such shares on Nasdaq
for that date. As of February 25, 2000, there were 14,486,889 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Part III incorporates by reference from the
Registrant's Definitive Proxy Statement for its 2000 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
1999.
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Item 1. Business.
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GENERAL
Century Casinos, Inc. and its subsidiaries (the "Company"), own and operate
a limited-stakes gaming casino in Cripple Creek, Colorado, manage a casino in
the Marriott Hotel in Prague, Czech Republic, and regularly pursue gaming
opportunities internationally and in the United States. Prior to July 1, 1996,
the Company's operations in Cripple Creek consisted of Legends Casino
("Legends"), which the Company had acquired on March 31, 1994, through a merger
with Alpine Gaming, Inc. ("Alpine"). On July 1, 1996, the Company acquired the
net assets of Gold Creek Associates, L.P. ("Gold Creek"), the owner of Womack's
Saloon & Gaming Parlor ("Womacks"), which was adjacent to Legends. Following
the acquisition of Womacks, both properties were renovated to facilitate
operation and marketing of the combined properties as one casino under the name
"Womacks/Legends Casino." The Company's operating revenue for 1999 and 1998 was
derived principally from its casino operations in Cripple Creek. See the
Consolidated Financial Statements and the notes thereto included herein.
The Company was formed in 1992 to acquire ownership interests in, and to
obtain management contracts with respect to, gaming establishments. The
Company, formerly known as Alpine, is a result of a business combination
completed on March 31, 1994, pursuant to which Century Casinos Management, Inc.
("Century Management") shareholders acquired approximately 76% of the then
issued and outstanding voting stock of the Company, and all officer and board
positions of the Company were assumed by the management team of Century
Management. Effective June 7, 1994, the Company reincorporated in Delaware
under the name "Century Casinos, Inc." Because the Company is the result of
this transaction, the Company's business has been combined with that of Century
Management, and references herein to the Company refer to the combined entities,
unless the context otherwise requires.
Century Management was founded in 1992 by a team of career gaming
executives who had worked primarily for an Austrian gaming company that owned
and operated casinos throughout the world. These persons held the positions of
chief executive officer, deputy to the chief executive office and managing
director.
Information contained in this Form 10-KSB contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, which can be identified by the use of words such as "may," "will,"
"expect,""anticipate," "estimate" or "continue," or variations thereon or
comparable terminology. In addition, all statements, other than statements of
historical facts, that address activities, events or developments that the
Company expects, believes or anticipates will or may occur in the future, and
other such matters, are forward-looking statements.
The future results of the Company may vary materially from those
anticipated by management, and may be affected by various trends and factors,
which are beyond the control of the Company. These risks include the
competitive environment in which the Company operates, the Company's dependence
upon the Cripple Creek, Colorado gaming market, the effects of governmental
regulation and other risks described herein.
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PROPERTY AND PROJECT DESCRIPTIONS
WOMACKS/LEGENDS CASINO, CRIPPLE CREEK, COLORADO.
On July 1, 1996, the Company purchased substantially all of the assets, and
assumed substantially all of the liabilities, of Gold Creek, the owner of
Womacks in Cripple Creek, Colorado. Following the Company's acquisition of Gold
Creek, the Womacks property was consolidated with the Company's Legends Casino,
and the combined properties have been operated and marketed since then as one
casino under the name "Womacks/Legends Casino." Management implemented certain
consolidation, expansion and capital improvement programs. The Company created
openings in the common walls in order to open up and integrate the gaming areas
of Legends and Womacks; expanded the existing player tracking system of Womacks
to include all of the Legends gaming devices; added and promoted gaming
activities on second floor areas; made general interior enhancements; and
installed additional gaming devices and replaced older generation equipment.
Womacks/Legends Casino is located at 200 to 220 East Bennett Avenue in
Cripple Creek, Colorado. The lots comprising 200 to 210 East Bennett Avenue are
owned by wholly-owned subsidiaries of the Company and are collateralized by a
first mortgage held by Wells Fargo Bank. See Note 5 to the Consolidated
Financial Statements for further information.
The Company holds a leasehold interest in the real property and
improvements located at 220 East Bennett Avenue. An unaffiliated third party,
as fee owner of the property, granted first and second deeds of trust for the
benefit of Park State Bank ("Park") and Community Banks of Colorado Cripple
Creek ("Community"), respectively. The third party then leased the property to
Teller Realty, Inc. ("Teller") and granted to Teller an option to acquire the
fee interest in the property. Teller subsequently executed a sublease to the
property with Gold Creek, and granted to Gold Creek a suboption to purchase the
property through Teller's purchase option. The Company's wholly-owned
subsidiary which purchased the assets of Gold Creek, WMCK Acquisition Corp.
("WMCK"), has executed separate subordination, non-disturbance and attornment
agreements with each of Park and Community, pursuant to which WMCK has agreed
that its interest in the sublease is subordinate to the liens arising out of the
deeds of trust in the fee estate in favor of Park and Community. In return,
Park and Community have each agreed (i) not to disturb WMCK's possessory rights
in and to the property, and (ii) to honor the sublease and suboption, should
either foreclose on their respective lien, so long as WMCK is not in default
under the sublease, and so long as WMCK attorns to Park, Community or any
purchaser at a foreclosure. The sublease, as assigned to WMCK, provides for
monthly rental payments of $16,000, and expires on June 20, 2005 unless
terminated earlier by WMCK with 12 months' notice. The suboption may be
exercised at the expiration of the sublease at an exercise price of $1,500,000.
Teller, the third party, Gold Creek and WMCK have executed a four-party
agreement evidencing the assignment of the sublease and suboption, as well as
the consent to these assignments. None of the above entities other than WMCK is
affiliated with the Company.
In June 1998, the Company acquired 22,000 square feet of land (the "Hicks
Property") from an unaffiliated third party. The property, which is zoned for
gaming, is adjacent to Womacks/Legends Casino. A partially-completed building
structure that occupied a portion of the land was subsequently razed, and the
entire property has been improved to provide the first paved customer parking
spaces in the Cripple Creek market. The purchase price of $3.6 million was
financed through the Company's revolving credit facility with Wells Fargo Bank.
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Womacks/Legends Casino currently has approximately 608 slot and video devices
and eight gaming tables with the potential to add approximately 60 gaming
positions without conducting any substantial construction. Womacks/Legends
Casino has 150 feet of frontage on Bennett Avenue, the main gaming thoroughfare
in Cripple Creek, and 110 feet of frontage on Second Street, with approximately
40,000 square feet of floor space.
In the fourth quarter of 1999, the Company began construction of a
two-story building in Cripple Creek, which is expected to be completed in the
second quarter of 2000. The building, with an estimated total cost of $900,000,
will house the Company's corporate headquarters and "The Womacks Center -
Cripple Creek." Located next to the Womacks/Legends Casino, the 500-seat
Womacks Center is the first of its kind in Cripple Creek and is surrounded by
parking lots controlled by the Company. Under the terms of an agreement with
the City of Cripple Creek, the City will operate and market the center for its
own account and will schedule meetings, conventions, shows and other special
events on a year-round basis.
Management believes that, in addition to providing an adequate number of
hotel rooms, an integral component in attracting gaming patrons to Cripple Creek
is the availability of adequate, nearby parking spaces. Management believes
that it has secured or will be able to secure adequate parking for the
operations of Womacks/Legends Casino. The Company presently owns or leases
several hundred parking spaces, with an additional 100 spaces becoming available
with the impending purchase of two nearby parcels of land in the second quarter
of 2000.
In 1997, the Company exercised its purchase option to acquire three lots
(formerly known as the "Wright Property"), consisting of 8,250 square feet of
land across the street from Womacks/Legends Casino, for $785,000 in cash. This
acquisition provides the Company with 30 additional parking spaces.
The Company leases 99 contiguous parking spaces from the City of Cripple
Creek. Annual rent payments total $90,000 and the lease agreement, as amended
on February 17, 2000, expires on May 31, 2010. The agreement contains a
purchase option whereby the Company may purchase the property for $3.25 million,
less cumulative lease payments, at any time during the remainder of the lease
term. The Company has paved the property and currently uses it for customer
parking.
In March 1999, the Company entered into a purchase option agreement for a
piece of property, located in Cripple Creek across Bennett Avenue from its
Womacks/Legends Casino. The agreement, as amended in February 2000, provides
for an option period through March 31, 2004 and an exercise price of $1.5
million, less 50% of cumulative option payments through the exercise date.
In November 1999, the Company entered into a contract to purchase two
parcels of land located near the Womacks/Legends Casino for $1.85 million. The
purchase is expected to be completed in the second quarter of 2000. The two
parcels will provide an estimated additional 100 parking spaces for casino
patrons.
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CASINO MILLENNIUM, PRAGUE, CZECH REPUBLIC
In January 1999, the Company reached a 20-year definitive agreement with
Casino Millennium a.s., a Czech company, and with B.H. Centrum a.s., a Czech
subsidiary of Bau Holding AG, one of the largest construction and development
companies in Europe, to operate a casino in the five-star Marriott Hotel in
Prague, Czech Republic. The Company provides casino management services in
exchange for 10% of the casino's gross revenue, and has provided gaming
equipment for 45% of the casino's net profit. The hotel and casino opened in
July 1999.
In January 2000, the Company entered into a memorandum of agreement to either
acquire a 50% ownership interest in Casino Millennium a.s. or to form a new
joint venture with B.H. Centrum a.s., which joint venture would acquire all of
the assets of Casino Millennium. The Company anticipates that the transaction
would be completed in 2000.
ADDITIONAL COMPANY PROJECTS
In addition to Womacks/Legends Casino in Cripple Creek, Colorado and Casino
Millennium in Prague, Czech Republic, the Company has a number of potential
gaming projects in various stages of development. Along with the capital needs
of these potential projects, there are various other risks which, if they
materialize, could materially adversely affect a proposed project or eliminate
its feasibility altogether. For example, in order to conduct gaming operations
in most jurisdictions, the Company must first obtain gaming licenses or receive
regulatory clearances. To date, the Company has obtained gaming licenses or
approval to operate gaming facilities in Colorado, Louisiana, on an American
Indian reservation in California, and in the Czech Republic. While management
believes that the Company is licensable in any jurisdiction, each licensing
process is unique and requires a significant amount of funds and management
time. The licensing process in any particular jurisdiction can take significant
time and expense through licensing fees, background investigation costs, fees of
counsel and other associated preparation costs. Moreover, should the Company
proceed with a licensing approval process with industry partners, such industry
partners would be subject to regulatory review as well. The Company seeks to
satisfy itself that industry partners are licensable, but cannot assure that
such partners will, in fact, be licensable. Additional risks before commencing
operations include the time and expense incurred and unforeseen difficulties in
obtaining suitable sites, liquor licenses, building permits, materials,
competent and able contractors, supplies, employees, gaming devices and related
matters. In addition, certain licenses include competitive situations where,
even if the Company is licensable, other factors such as the economic impact of
gaming and financial and operational capabilities of competitors must be
analyzed by regulatory authorities. All of these risks should be viewed in
light of the Company's limited staff and limited capital.
Also, the Company's ability to expand to additional locations will depend
upon a number of factors, including, but not limited to: (i) the identification
and availability of suitable locations, and the negotiation of acceptable
purchase, lease, joint venture or other terms; (ii) the securing of required
state and local licenses, permits and approvals, which in some jurisdictions are
limited in number; (iii) political factors; (iv) the risks typically associated
with any new construction project; (v) the availability of adequate financing on
acceptable terms; and (vi) for locations outside the United States, all the
risks of foreign operations, including currency controls, unforeseen local
regulations, political instability and other related risks. Certain
jurisdictions issue licenses or approval for gaming operations by inviting
proposals from all interested parties, which may increase competition for such
licenses or approvals. The development of dockside and riverboat casinos may
require approval from the Army Corps of Engineers and will be subject to
significant Coast Guard regulations governing design and operation. Most of
these factors are beyond the control of the Company. As a result, there can be
5
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no assurance that the Company will be able to expand to additional locations or,
if such expansion occurs, that it will be successful. Further, the Company
anticipates that it will continue to expense certain costs, which have been
substantial in the past and may continue to be substantial in the future, in
connection with the pursuit of expansion projects, and may be required to write
off any capitalized costs incurred in connection with these ventures.
The following describes other activities of the Company.
SOUTH AFRICA. Recently enacted legislation in South Africa provides for
the award of up to 40 casino licenses throughout the country. To date, the
Company has entered into agreements with various local consortia to provide
consulting services during the application phase, as well as casino management
services should the Company's partners be awarded one or more licenses.
An application for a casino license in Caledon, province of the Western
Cape, was filed in October 1999 with the Western Cape Gambling and Racing Board
by Caledon Casino Bid Company (Pty) Limited ("CCBC"). The Company's subsidiary,
Century Casinos Africa (Pty) Ltd "CCA"), will have a 50% equity interest in
CCBC, by virtue of an agreement entered into between CCA and CCBC, together with
various affiliated entities. On February 16, 2000, the Western Cape Board
awarded Successful Applicant status to CCBC. The final license is to be issued
upon the provision, within 60 days of that date, of the required financial
guarantees and the satisfaction of certain other conditions precedent which are
primarily procedural in nature. CCBC anticipates that it will be able to
satisfy the conditions precedent to the award within the time stipulated. Upon
the award of the final license, the Company (through CCA) is obligated to fund
R10 million (South African Rands) of equity and R15 million in loans to CCBC
(approximately US$1,630,000 and US$2,445,000, respectively, based on the
December 31, 1999 currency exchange rate). In December 1999, in anticipation of
a successful application, the Company entered into a ten-year casino management
agreement with CCBC, which agreement may be extended at the Company's option
for multiple ten-year periods. The Company will earn management fees based on
percentages of annual gaming revenue and earnings before interest, income taxes,
depreciation, amortization and certain other costs.
An application was filed in June 1997 with the Gambling and Betting Board (the
"Board") in the province of Gauteng for a hotel/casino resort in the greater
Johannesburg area. Silverstar Development Ltd. ("Silverstar"), the consortium
to which the Company is the contracted casino management partner, and in which
the Company holds a minority equity interest, had submitted an application for a
proposed $70 million, 1,700 gaming position hotel/casino resort development.
The Board had awarded all six casino licenses by the end of April 1998, and
Silverstar was not awarded one of the licenses. The Company recorded an
impairment allowance against its entire equity investment in Silverstar in the
amount of $196,022 in the first quarter of 1998. Silverstar subsequently filed
a legal action with the High Court of South Africa (the "High Court")
challenging the decision of the Gauteng Board and the provincial government in
their failure to award a casino license to Silverstar on the grounds that the
decision-making process was legally deficient. In March 1999, the High Court
overturned the previous license award that had been sought by Silverstar, and
remanded the licensing process for the West Rand region to the provincial
government. The competing license applicant appealed the ruling, but in April
1999, the High Court rejected the request for leave to appeal its March ruling.
This defendant also made no request for leave to appeal with the Appeals Court,
the final court of appeal. In June 1999, the Executive Council of the
provincial government resolved not to concur with the Gauteng Board's
recommendation of the competing applicant. In July 1999, the competing
applicant instituted action in the Court seeking to overturn the Executive
Council's decision. No date has yet been set for a hearing in the High Court of
the competing applicant's complaint. There can be no certainty regarding an
award of this gaming license or that this license will ultimately be awarded to
Silverstar.
6
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Another application was filed in January 1998, by the Company's partner, Great
North Resorts Limited, for a casino license in Pietersburg, the provincial
capital of the Northern Province. If successful in receiving a license, the
Company would provide consulting/management services with respect to the casino
operations of a proposed $40 million casino, hotel, entertainment and resort
complex pursuant to a five-year agreement commencing with the opening of the
permanent casino. The Company would also provide consulting/management services
with respect to the operations of a temporary casino during the development
phase of the resort complex. The Company would earn fees based on a percentage
of annual gaming revenue. The Company has no significant additional capital
obligations with respect to this application. The licensing process in the
Northern Province has been overturned as a result of a successful action in the
High Court initiated by a competing applicant. There remains the possibility
that this decision may be appealed by the provincial authorities and the future
of the whole licensing process is presently unclear.
RIVERBOAT DEVELOPMENT AGREEMENT - INDIANA. - In December 1995, the Company
sold its 80% interest in Pinnacle Gaming Development Corp. ("Pinnacle") to an
affiliate of Hilton Gaming Corporation and Boomtown, Inc. ("Hilton/Boomtown").
Pinnacle had been pursuing a riverboat gaming license application in Switzerland
County, Indiana. Upon signing the agreement, the Company received a cash payment
of $80,000 and recognized a gain on the sale of its investment of $26,627. The
agreement provided for additional payments to the Company upon the occurrence of
certain events. In September 1998, the Indiana Gaming Commission awarded a
Certificate of Suitability to Pinnacle to conduct riverboat gaming in
Switzerland County that resulted in the Company receiving a payment of $431,000
in the third quarter of 1998. The Company also received a payment of $1,040,000
in the third quarter of 1999 upon "groundbreaking" of the project. Additionally,
the Company was entitled to receive installment payments of $32,000 per month
for the first 60 months of the riverboat's operation; however, the Company
elected to receive an aggregate discounted amount of $1,380,000, which was
received and recorded as income in January 2000.
RHODES, GREECE. In 1995, the Company executed a casino management and
consulting agreement with Rhodes Casino, S.A., a consortium including Playboy
Enterprises, Inc., under which the Company, as an independent contractor, would
supply services and assistance in establishing a casino on the island of Rhodes,
Greece. The consortium was awarded the exclusive license for casino gaming on
Rhodes for a 12-year period commencing with the opening of the casino. The
Company's management consulting agreement with the consortium, which had an
initial term running through the third anniversary of the casino opening,
provided for fees to the Company of $200,000 for services to be rendered in the
pre-opening phase, $300,000 per year during the first three years of operation
and $50,000 per year thereafter, if renewed. In the fourth quarter of 1996, the
Company received $50,000 with respect to certain pre-opening phase services. In
the second quarter of 1998, the Company reached a consulting agreement ("current
agreement") with Rhodes Casino S.A. and Playboy Gaming International Ltd.
("Playboy") to assign certain of the Company's rights and delegate its
responsibilities under the previously executed management and consulting
agreement ("previous agreement"). Under the current agreement, in 1998, the
Company received from Playboy a payment of $25,000 for additional pre-opening
services performed to date. The Company also is to receive annual payments of
$50,000 for each of the first three years of the casino's operations, the first
of which payments was received in 1999. The Company will have no further
obligations under the previous agreement unless, subsequent to the opening of
the casino, Playboy is unwilling or unable to perform under the current
agreement. In such event, the previous agreement, and the Company's
obligations, would be reinstated together with the Company's right to receive up
to $300,000 per year for the first three years of casino operations, with an
aggregate minimum guarantee of approximately $250,000.
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NONOPERATING CASINO IN WELLS, NEVADA. In 1994, the Company purchased the Ranch
House Casino in Wells, Elko County, Nevada from an unaffiliated party. The total
purchase price of $851,504, including a note secured by the property, was
determined based on arm's length bargaining with the seller. Also in 1994, the
Company purchased a seven-acre parcel of land directly across the street from
the casino for $69,000. In April 1997, the Company paid off all amounts owed to
the seller and now owns the property free and clear. The property, closed since
1992 but in operable condition, is an 18,000 square foot building with
approximately 6,000 square feet of gaming space. Management currently does not
intend to pursue a gaming license with respect to the facility, and is seeking a
sale or lease of the casino and land.
INDIAN TRIBAL MANAGEMENT AGREEMENT - CALIFORNIA - In August 1995, the
Company terminated its management agreement with the Soboba Band of Mission
Indians with respect to the Legends Casino at Soboba in Riverside County,
California. In connection with the termination, an unaffiliated third party
issued a three-year promissory note to the Company for $3,100,000, with monthly
payments based on a percentage of gross revenue from certain operations of the
facility. In March 1998, the Company negotiated an early settlement of the
then-remaining outstanding balance. As a result, the Company received
cumulative payments through the date of settlement of $2,457,727, of which the
final $550,000 was recognized in income in 1998. No further payments will be
received under the note.
REVOLVING CREDIT FACILITY
In March 1997, the Company entered into a four-year revolving line of
credit facility (the "RCF") with Wells Fargo Bank ("Wells Fargo"). Various
provisions of the RCF were subsequently amended, including an increase in the
facility to $20 million in 1998, and decreasing quarterly beginning in the
second quarter of 1999. At December 31, 1999, the maximum available under the
RCF was $18.3 million. An annual commitment fee of between three-eighths and
one-half percent, payable quarterly, is charged on the unused portion of the
RCF. The RCF also contains an interest rate matrix that ties the interest rate
charged on outstanding borrowings to the Company's leverage ratio, as defined.
Largely as a result of an improvement in the Company's leverage ratio, the
Company's consolidated weighted-average interest rate on all borrowings
decreased from 8.74% in 1998 to 8.64% in 1999. At December 31, 1999, the
Company's unused borrowing capacity under the RCF was approximately $9.2
million. The RCF is secured by substantially all of the real and personal
property of Womacks/Legends Casino. Under the RCF, the Company is required to
comply with certain customary financial covenants, and is subject to certain
capital expenditure requirements and restrictions on investments. See Note 5 to
the Consolidated Financial Statements for further information.
In March 2000, the Company is in the final stages of negotiations with
Wells Fargo Bank to increase the RCF to $26 million and extend the maturity date
of the agreement until 2004. Management expects the agreement to be finalized
before the end of the first quarter 2000, however, there can be no assurances
that the line will be renewed or extended on the terms described herein. A
portion of the proceeds of borrowings under the RCF is expected to be used for
the development of the Company's South Africa projects discussed above.
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MARKETING STRATEGY
The marketing strategy of Womacks/Legends Casino highlights promotion of
Womacks Gold Club, a players club with a database containing profiles on nearly
50,000 members. Gold Club members receive benefits from membership, such as
cash, merchandise, food and lodging. Those who qualify for VIP status receive
additional benefits in addition to regular club membership. Status is determined
through player tracking. Members receive monthly newsletters of upcoming events
and parties, and, depending on player ranking, also receive invitations to
special events and monthly coupons.
THE CRIPPLE CREEK MARKET
Cripple Creek is a small mountain town located approximately 45 miles
southwest of Colorado Springs on the western boundary of Pikes Peak. Cripple
Creek is an historic mining town, originally founded in the late 1800's
following a large gold strike. Cripple Creek is a tourist town and its heaviest
traffic is in the summer months. Traffic generally decreases to its low point
in the winter months.
Cripple Creek is one of only three Colorado cities where casino gaming is
legal, the others being Black Hawk and Central City. Cripple Creek operated
approximately 29% of the gaming devices and generated 22% of gaming revenues for
these three cities during the year ended December 31, 1999. As of December 31,
1999, there were 18 casinos operating in Cripple Creek.
The tables below set forth information obtained from the Colorado Division
of Gaming regarding gaming revenue by market and slot machine data for Cripple
Creek from calendar 1996 through 1999. This data is not intended by the Company
to imply, nor should the reader infer, that it is any indication of future
Colorado or Company gaming revenue.
<TABLE>
<CAPTION>
GAMING REVENUE BY MARKET
(IN $000'S)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% change % change % change % change
Over Over Over Over
1996 Prior Year 1997 Prior Year 1998 Prior Year 1999 Prior Year
CRIPPLE CREEK. $ 103,373 9.9% $ 108,628 5.1% $113,230 4.2% $122,385 8.1%
--------- ----------- --------- ----------- -------- ----------- -------- -----------
Black Hawk . . $ 219,911 12.3% $ 234,631 6.7% $272,008 15.9% $354,474 30.3%
Central City . $ 88,870 -5.9% $ 87,391 -1.7% $ 93,980 7.5% $ 73,742 -21.5%
COLORADO TOTAL $ 412,154 7.2% $ 430,650 4.5% $479,218 11.3% $550,601 14.9%
</TABLE>
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<TABLE>
<CAPTION>
CRIPPLE CREEK SLOT DATA
(IN $000'S)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% change % change % change % change
Over Over Over Over
1996 Prior Year 1997 Prior Year 1998 Prior Year 1999 Prior Year
Total Slot Revenue. $ 97,024 11.1% $ 102,798 6.0% $107,690 4.8% $117,161 8.8%
--------- ----------- --------- ----------- -------- ----------- -------- -----------
(in $'000)
Average Number
Of Slots. . . . . . 4,175 8.6% 4,507 8.0% 4,369 -3.1% 4,046 -7.4%
Average Win Per
Slot Per Day. . . . $63 2.0% $62 -1.6% $68 8.1% $81 19.9%
</TABLE>
Gaming in Colorado is "limited stakes," which restricts any single wager
to a maximum of $5.00. While this limits the revenue potential of table
games, management believes that slot machine play, which accounts for over 95%
of total gaming revenues, is currently impacted only marginally by the $5.00
limitation.
The Company faces intense competition from other casinos in Cripple Creek,
including a handful of casinos of similar size and many other smaller casinos.
There can be no assurance that other casinos in Cripple Creek will not undertake
expansion efforts similar to those recently taken by the Company, thereby
further increasing competition, or that large, established gaming operators will
not enter the Cripple Creek market. The Company seeks to compete against these
casinos through promotion of Womacks Gold Club and superior service to players.
Management believes that the casinos likely to be more successful and best able
to take advantage of the market potential of Cripple Creek will be the larger
casinos that have reached a certain critical mass.
<TABLE>
<CAPTION>
CENTURY CASINOS' PROPERTY IN CRIPPLE CREEK
(PRESENTLY "WOMACKS/LEGENDS CASINO")
(IN $000'S)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% change % change % change % change
Over Over Over Over
1996 Prior Year 1997 Prior Year 1998 Prior Year 1999 Prior Year
Total Slot Revenue. $ 10,078 208.6% $18,102 79.6% $18,597 2.7% $22,235 19.6%
---------- ----------- ---------- ----------- -------- ----------- -------- -----------
(in $'000)
Average Number
Of Slots. . . . . . 342 98.8% 547 59.9% 565 3.3% 592 4.8%
Average Win Per
Slot Per Day. . . . $80.73 55.2% $90.67 12.3% $90.18 -0.5% $102.56 13.7%
Market Share in % . 10.39% 177.7% 17.61% 69.5% 17.27% -1.9% 18.91% 9.5%
</TABLE>
10
<PAGE>
The Company competes, to a far lesser extent, with 19 casinos in Black Hawk
and 11 casinos in Central City. Black Hawk and Central City are also small
mountain tourist towns, which adjoin each other and are approximately 30 miles
from Denver and a two and one-half hour drive from Cripple Creek. The main
market for Cripple Creek is the Colorado Springs metropolitan area, and the main
market for Black Hawk and Central City is the Denver metropolitan area.
In addition, there is intense competition among companies in the gaming
industry generally, and many gaming operators have greater name recognition and
financial and marketing resources than the Company. The Company competes with
many established operators in gaming venues other than Cripple Creek. Many of
these operators have greater financial, operational and personnel resources than
the Company. There can be no assurance that the number of casino and hotel
operations will not exceed market demand or that additional hotel rooms or
casino capacity will not adversely affect the operations of the Company.
EMPLOYEES
The Company employs approximately 200 persons on an equivalent full-time
basis, including cashiers, dealers, food and beverage service personnel,
facilities maintenance staff, and accounting and marketing personnel. No labor
unions represent any employee group. A standard package of employee benefits is
provided to full-time employees along with training and job advancement
opportunities. In March 1998, the Company adopted a 401(k) Savings and
Retirement Plan for its employees.
SEASONALITY
The Company's business is not considered to be seasonal; however, the
anticipated highest levels of business activity, at least in Colorado, will
occur in the tourist season (i.e., from May through September). Its base level
(i.e., November through May) is expected to remain fairly constant although
weather conditions during this period could have a significant impact on
business levels in Colorado.
GOVERNMENTAL REGULATION
The Company's gaming operations are subject to strict govern-mental
regulations at state and local levels. Statutes and regulations can require the
Company to meet various standards relating to, among other matters, business
licenses, registration of employees, floor plans, background investigations of
licensees and employees, historic preserva-tion, building, fire and
accessibility require-ments, payment of gaming taxes, and regulations concerning
equip-ment, machines, tokens, gaming participants, and ownership inter-ests.
Civil and criminal penalties can be assessed against the Company and/or its
officers or stockholders to the extent of their individual participation in, or
association with, a violation of any of the state and local gaming statutes or
regulations. Such laws and regulations apply in all jurisdic-tions within the
United States in which the Company may do business. Management believes that the
Company is in compliance with applicable gaming regulations. For purposes of the
discussion below, the term "the Company" includes its applicable subsidiaries.
11
<PAGE>
COLORADO REGULATION
The Colorado Limited Gaming Control Commission ("Commission") has adopted
regulations regarding the ownership of gaming establish-ments by publicly held
companies (the "Regulations"). The Regulations require the prior clearance of,
or notification to, the Commission before any public offering of any securities
of any gaming licensee or any affiliated company. The Regulations require all
publicly traded or publicly owned gaming licensees to comply with numerous
regulatory gaming requirements. These requirements include, but are not limited
to, those listed below.
A publicly traded gaming licensee that sends to the holders of its voting
securities any proxy statements subject to Regulation 14A of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), or an information statement
subject to Regulation 14C of the 1934 Act, must file such material with the
Colorado Division of Gaming (the "Colorado Division").
Whenever any document is furnished to the holders of voting securities of
a publicly traded gaming licensee or filed by a publicly traded gaming licensee
with the SEC, the publicly traded gaming licensee is required to file a true
copy of that document with the Colorado Division. Whenever a publicly traded
gaming licensee receives any material document filed with the SEC by any other
person relating to the publicly traded gaming licensee, it must file a true copy
of the document with the Colorado Division. Each publicly traded gaming
licensee must file with the Colorado Division, on an annual basis, a list of the
holders of its voting securities.
Each publicly traded gaming licensee is required to report promptly to the
Colorado Division the election or appointment of any director, any executive
officer and any other officers actively and directly engaged in the
administration or supervision of the gaming activities at any licensed gaming
establishment.
The following provisions are required to be included in the certificate of
incorporation for every publicly traded gaming licensee or holding company which
has a gaming license in the State of Colorado.
(i) The entity is precluded from issuing any voting securities except
in accordance with the provisions of the Colorado Limited
Gaming Act ("Gaming Act") and the regulations promulgated
thereunder. The issuance of any voting securities in violation
of the Gaming Act is ineffective and such voting securities
are deemed not to be issued and outstanding until (a) the
entity ceases to be subject to the jurisdiction of the
Commission, or (b) the Commission, by affirmative action,
validates the issuance or waives any defect in the issuance.
(ii) No voting securities issued by the entity and no interest in the
entity can be transferred in any manner except in accordance with
the provisions of the Gaming Act and its regulations. Any
transfer in violation of the Gaming Act is ineffective until (a)
the entity ceases to be subject to the jurisdiction of the
Commission, or (b) the Commission, by affirmative action,
validates the transfer or waives the defect in the transfer.
12
<PAGE>
(iii) If the Commission at any time determines that a holder of
voting securi-ties of the entity is unsuitable to hold the
securities, then the issuer of the securities may, within 60
days after the finding of unsuitability, purchase the
securities of the un-suitable person at the lesser of (i) the
cash equivalent of such person's investment in the entity, or (ii)
the current market price of the date of finding of
unsuitability, unless the securities are transferred to a
suitable person, as determined by the Commission, within 60
days after the finding of unsuitability. Until the securities
are owned by persons found by the Commission to be suit-able to
own them, (a) the entity is not required or permitted to
pay any dividend or interest with regard to the securities, (b) the
holder of the securities is not entitled to vote on any matter
as the holder of the securities and such securities shall not
for any purpose be included in the voting securities of the entity,
and (c) the entity is precluded from paying any remuneration in any
form to the holder of the securities.
The Company has the above provisions in its Certificate of Incorporation.
The Regulations also require each person who individually or in association
with others acquires, directly or indirectly, beneficial ownership of 5% or more
of any class of voting securities of a publicly traded gaming licensee to notify
the Colorado Division within 10 days after the person acquired 5% or more of the
securities. The person who acquires 5% or more of the securities shall provide
any additional information requested by the Colorado Division and be subject to
a finding of suitabili-ty as required by the Colorado Division. Publicly traded
gaming licensees are also required to notify each person subject to the
Regula-tions of the Colorado Division's requirements as soon as the gaming
licensee becomes aware of the acquisition.
Each person who, individually or in association with others, acquires,
directly or indirectly, the beneficial ownership of 10% or more of any class of
voting securities of a publicly traded gaming licensee required to contain the
above charter provisions is required to apply to the Commission for a finding of
suitability within 10 days after acquiring 10% or more of the securities. A
publicly traded gaming licensee is also required to notify each person subject
to the Regulations of its requirements as soon as the gaming licensee becomes
aware of the acquisition. However, the obligations of the person subject to the
Regulations are indepen-dent of and unaffected by the gaming licensee's failure
to give the notice.
Any person found unsuitable by the Commission is not permitted ownership of
any voting security of a publicly traded gaming licensee, subject to the
provisions of the Regulations, and must be removed immediately from any position
as a director, officer or employee of the publicly traded gaming licensee.
The State of Colorado created the Colorado Division within the Department
of Revenue to license, implement, regulate and supervise the conduct of limited
gaming. The Director of the Colorado Division, under the supervision of a
five-member Colorado Commission, has been granted broad power to ensure
compliance with the law, and regulations adopted thereun-der. The Director may
inspect, without notice, premises where gaming is being conducted; he may seize,
impound or remove any gaming device. He may examine and copy any licensee's
records, may investigate the background and conduct of licensees and their
employees, and may bring disciplinary actions. He may also conduct detailed
background checks of persons who loan money to the Company.
13
<PAGE>
The Commission is empowered to issue five types of gaming and gaming
related licenses. The Colorado Division has broad discretion to revoke,
suspend, condition, limit or restrict a license at any time. The license of the
Company must be renewed each year. All licenses are revoca-ble,
non-trans-fer-able and valid only for the particular location initially
authorized. No person, such as the Company, can have an ownership interest in
more than three retail licenses. Hence, the Company's business opportunities in
Colorado could be limited accordingly. All of the Company's employees involved
with gaming activities must apply for and receive a support gaming license prior
to commencing employment. The Commission has adopted comprehensive rules and
regulations which require the Company to maintain adequate books and records and
these rules also prescribe minimum operating, security and payoff procedures.
The Commission has the power to deny any license or renewal thereof to any
person it considers to be "unsuit-able," a broad, discretionary standard. The
Commission has also promulgated a list of excluded persons; it is unlawful for
any person on this list to enter licensed premises or to hold shares in a
licensee. Rules regarding gaming, cheating and other fraudulent practices have
also been adopted, which rules the Company is obligated to police and enforce.
Other state regulatory agencies also impact the Company's opera-tions,
particularly its license to serve alcoholic beverages. Rules and regulations in
this regard are strict, and loss or suspension of a liquor license could
significantly impair, if not ruin, a licensee's operation. Local building,
parking and fire codes and similar regulations could also impact the Company's
operations and proposed development of its properties.
Item 2. Properties.
- ------- ----------
The Company's corporate offices are located at its Womacks/Legends Casino
at 200 - 220 East Bennett Avenue, Cripple Creek, Colorado. The Company also
rents a small office at 999 18th Street, Suite 1810, Denver, Colorado pursuant
to a lease with an unaffiliated party. The Company intends to close its Denver
office at the end of March 2000. See Item 1. "Business -- Property and Project
Descriptions" herein for a description of the Company's other properties.
Item 3. Legal Proceedings.
- ------- ------------------
The Company is not a party to, nor is it aware of, any pending or
threatened litigation which, in management's opinion, could have a material
adverse effect on the Company's financial position or results of operations.
14
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- -----------------------------------------------------------
The 1999 annual meeting of the stockholders of the Company was held on
December 14, 1999. At the annual meeting, (i) the two Class II directors to the
Board, Peter Hoetzinger and James D. Forbes, were elected to the Board for a
three-year term; (ii) a proposal to amend Article FOURTH of the Company's
Certificate of Incorporation to effect a reverse stock split of the Company's
common stock on a ratio not to exceed one for 20 was adopted by stockholders of
the Company; (iii) a proposal to increase the number of shares reserved for
issuance under the Employees' Equity Incentive Plan from 3,500,000 to 4,500,000
was adopted by the stockholders of the Company; and, (iv) a proposal to amend
Articles NINTH and TENTH of the Certificate of Incorporation of the Company to
add two additional fair price provisions which, in certain circumstances, may
require payment of a higher price to stockholders of the Company was not adopted
by the stockholders of the Company. On the proposal to elect the Class II
directors, the votes were: Peter Hoetzinger, 12,439,435 for, 132,578 against,
and 24,350 abstained; James D. Forbes, 12,443,435 for, 132,578 against, and
20,350 abstained. On the proposal with respect to the amendment to Article
FOURTH, the results were: 10,681,133 for, 1,903,155 against, and 12,075
abstained. On the proposal with respect to the amendment to the Employees'
Equity Incentive Plan, the results were: 7,820,308 for, 513,770 against, 32,150
abstained, and 4,230,135 not voted. On the proposal with respect to amendments
to Articles NINTH and TENTH, the results were: 5,853,851 for, 1,955,418 against,
5,150 abstained, and 4,751,944 not voted.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ----------------------------------------------------------------------
The common stock of the Company began trading in the Nasdaq SmallCap Market
on November 10, 1993. The following table sets forth the low and high bid price
per share quotations as reported on the NASDAQ SmallCap Market of the common
stock for the periods indicated. These quotations reflect inter-dealer prices,
without retail mark-up, mark down or commission and may not necessarily
represent actual transactions. Actual prices may vary.
<TABLE>
<CAPTION>
Quarter Ended Low High
- ------------------ ----- -----
<S> <C> <C>
March 31, 1998 . . $0.88 $1.25
June 30, 1998. . . $0.88 $1.31
September 30, 1998 $0.94 $1.13
December 31, 1998. $0.78 $1.03
March 31, 1999 . . $0.75 $1.31
June 30, 1999. . . $0.97 $1.19
September 30, 1999 $0.88 $1.03
December 31, 1999. $0.88 $1.03
</TABLE>
At December 31, 1999, the Company had approximately 140 shareholders of
record of its common stock; management estimates that the number of beneficial
owners is approximately 900.
At the present time, management of the Company intends to use any earnings
which may be generated to finance the growth of the Company's business.
Accordingly, while payment of dividends rests within the discretion of the Board
of Directors, no dividends have been declared or paid by the Company, and it
does not presently intend to pay dividends.
15
<PAGE>
Item 6.
- --------
Management's Discussion and Analysis of Financial Condition and Results
- -----------------------------------------------------------------------
of Operations
- -------------
BUSINESS ENVIRONMENT AND RISK FACTORS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes included elsewhere herein.
The Company's future operating results may be affected by various trends and
factors which are beyond the Company's control. These include, among other
factors, the competitive environment in which the Company operates, present
dependence upon the Cripple Creek, Colorado gaming market, changes in the rates
of gaming-specific taxes, shifting public attitudes toward the socioeconomic
costs and benefits of gaming, actions of regulatory bodies, dependence upon key
personnel, the speculative nature of gaming projects the Company may pursue,
risks associated with expansion, and other uncertain business conditions that
may affect the Company's business.
With the exception of historical information, the matters discussed below
under the headings "Results of Operations" and "Liquidity and Capital
Resources," may include forward-looking statements that involve risks and
uncertainties. The Company cautions the reader that a number of important
factors discussed herein, and in other reports filed with the Securities and
Exchange Commission, could affect the Company's actual results and cause actual
results to differ materially from those discussed in forward-looking statements.
RESULTS OF OPERATIONS
Net operating revenue increased significantly to $23,584,171 in 1999 from
$19,458,852 in 1998. The Company's casino revenue increased from $19,036,621 in
1998 to $22,726,004 in 1999, or 19.4%. Casino revenue in both years was
generated by the Womacks/Legends Casino, except for $34,244 that was derived
from a concession agreement which expired in January 1998. The Company's share
of the Cripple Creek market increased significantly from 16.8% in 1998 to 18.6%
in 1999. Womacks/Legends Casino operated approximately 14.6% of the gaming
devices in the Cripple Creek market in 1999, with an average win per day per
machine of $103 compared with a market average of $81. Gross margin from
company-wide casino activities increased from 59% in 1998 to 61% in 1999. The
increase in margin is attributable to a continuation of a focused management and
marketing approach for Womacks/Legends Casino. At the same time, a significant
number of new memberships in the casino's Gold Club were added again in 1999.
Additional emphasis was put into further refining the product mix, upgrading
both the interior of the facilities, as well as the slot machine mix. Parking
capacity was expanded and made more convenient as part of the Company's ongoing
efforts to provide the highest quality parking facilities for its customers.
Also contributing to the casino margin improvement were proportionately lower
payroll costs. Various other initiatives were undertaken that management
believes have resulted in greater attention to customer service.
16
<PAGE>
Food and beverage revenue increased from $878,991 in 1998 to $933,387 in
1999, or 6.2%. The increase is principally due to improvement in operations
that started to take effect in the second quarter of 1999. The cost of food and
beverage promotional allowances, which are included in casino costs, increased
only slightly from $842,305 in 1998 to $854,565 in 1999. Hotel revenue
increased from $62,624 to $149,131, principally as the result of a marketing
arrangement with a local hotel that commenced in late 1998 and continued through
September 1999. The increase in other revenue from 1998 to 1999 was chiefly due
to management fees from Casino Millennium of approximately $109,000 and the
Rhodes, Greece casino agreement of $50,000.
General and administrative expense increased from $5,850,870 in 1998 to
$6,710,215 in 1999, or 14.7%, but decreased as a percentage of net operating
revenue, from 30.1% in 1998 to 28.5% in 1999. The Company was able to reduce or
eliminate actual expenses for parking rent, office relocation, penalties and
fines, and workers' compensation insurance which contributed to proportionately
lower costs.
Depreciation increased from $1,655,176 in 1998 to $1,968,951 in 1999. The
increase is attributable to property improvements at Womacks/Legends Casino and
acquisition of new gaming equipment in Cripple Creek and Prague. Amortization
of goodwill was $1,341,504 in both years.
Interest expense decreased from $1,023,906 to $999,922, due to slightly
lower borrowings and a lower weighted-average interest rate. The
weighted-average interest rate was 8.64% in 1999 and 8.74% in 1998. The other
items included in the caption "Other expense, net" in the consolidated
statements of income, for both 1999 and 1998, are described in Note 9 to the
consolidated financial statements.
As more fully discussed in Note 8 to the consolidated financial statements,
the Company recognized income tax expense of $1,746,000 in 1999 versus $123,000
in 1998. The provision in 1999 is higher than the prior year's because the 1998
provision was substantially reduced due to a nonrecurring credit of $1,003,580
resulting from the reversal of a valuation allowance against net deferred tax
assets established in prior years.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents totaling
$2.5 million and net working capital of $1.1 million. Additional liquidity is
available under the Company's revolving credit facility ("RCF") with Wells Fargo
Bank. See Note 5 to the Consolidated Financial Statements for further
information on the RCF. The Company had unused borrowing capacity under the RCF
of approximately $9.2 million at December 31, 1999. Net cash provided by
operations was $3.8 million in 1999 compared with $4.2 million in 1998, with the
decrease primarily attributable to the cash payments for income taxes in 1999,
whereas income tax payments in 1998 were reduced due to available net operating
loss carryforwards. The Company used cash of $2.6 million for purchases of
property and equipment in 1999, principally gaming equipment for Cripple Creek
and Casino Millennium in Prague. In 1998, the Company used cash of approximately
$5.2 million for purchases, of which $3.6 million was used to purchase property
adjacent to Womacks/Legends Casino that was subsequently improved to provide
paved parking for casino patrons.
As more fully described in Note 5 to the consolidated financial statements,
during 1998 the Company renegotiated certain terms of the RCF. Among other
provisions, the maximum availability was increased from $13 million to $20
million and the interest rate structure was amended, which will further lower
the Company's cost of capital if certain leverage ratios are achieved.
17
<PAGE>
In March 2000, the Company is in the final stages of negotiations with
Wells Fargo Bank to increase the RCF to $26 million and extend the maturity
date of the agreement until 2004. Management expects the agreement to be
finalized before the end of the first quarter 2000, however, there can be no
assurances that the line will be renewed or extended on the terms described
herein. A portion of the proceeds of borrowings under the RCF is expected to
be used for purposes described below.
In the fall of 1999, the Company began construction of The Womacks
Center, described in Item 1 "Business - Property and Project
Descriptions - Womacks/Legends Casino, Cripple Creek, Colorado." Through
December 31, 1999, the Company had incurred costs of approximately $277,000,
with estimated additional costs to complete of approximately $623,000. The
Company expects to complete the construction of the building through a
combination of existing liquidity and anticipated cash flow.
Management has deferred a decision on whether to proceed with the
construction of a hotel and parking structure on its property across the street
from Womacks/Legends Casino until it has had time to assess the impact of new
hotel capacity on the Cripple Creek market. From November 1998 through
September 1999, Womacks/Legends Casino had an agreement with the operator of a
new local hotel whereby the casino leased a block of rooms from the hotel. The
casino made these rooms available to its customers, sometimes on a complimentary
basis, and provided a free shuttle service between the casino and the hotel.
For the near term, the Company's property, which has been earmarked for
construction of a hotel, is being used for customer parking.
In January 1999, the Company reached a 20-year definitive agreement with
Casino Millennium a.s., a Czech company, and with B. H. Centrum a.s. ("BHC"), a
Czech subsidiary of Bau Holding AG, one of the largest construction and
development companies in Europe, to operate a casino in the five-star Marriott
Hotel, in Prague, Czech Republic. The hotel and casino opened in July 1999.
The Company provides casino management services in exchange for ten percent of
the casino's gross revenue, and has provided gaming equipment for 45% of the
casino's net profit. Through December 31, 1999, the Company purchased gaming
equipment totaling $1,266,000 which is being leased to the casino. In January
2000, the Company entered into a memorandum of agreement with BHC to acquire the
casino by either a joint acquisition of Casino Millennium a.s. or the formation
of a new joint venture. Any funding required by the Company to consummate this
transaction would be met through a combination of existing liquidity and
anticipated cash flow.
The Company continues to pursue several gaming opportunities in South
Africa. The Company is the contracted casino management partner to a
consortium, Caledon Casino Bid Company (Pty) Limited ("CCBC"), which has been
awarded Successful Applicant status for a gaming license in the province of the
Western Cape. The final license is expected to be issued to Caledon upon the
provision of the required financial guarantees. In the event that Caledon
receives the license, the Company would be required to make equity and debt
investments totaling approximately $4.1 million. These fundings would be
accomplished through additional borrowings under the revolving credit facility.
There can be no certainty, however, that Caledon will ultimately be awarded the
license.
18
<PAGE>
The Company is also the contracted casino management partner to another
consortium, Silverstar Development Ltd. ("Silverstar"), which is an applicant
for a gaming license in the province of Gauteng, South Africa. The Company has
a small equity position in Silverstar. The application process has been the
subject of litigation and the successful outcome of Silverstar's application is
uncertain. In the event that Silverstar would be awarded a license, the Company
would be required to make an additional equity investment of approximately $1.5
million. This funding requirement would be met through borrowings under the
revolving credit facility. The Company has also projected additional
development costs of up to $500,000 which could be incurred by the Company
related to this project.
In 1998, the Company's Board of Directors approved a discretionary program
to repurchase up to $2 million of the Company's outstanding common stock. The
Board believes that the Company's stock is undervalued in the trading market in
relation to both its present operations and its future prospects. Through
December 31, 1999, the Company had repurchased 1,385,000 shares at an average
cost per share of $1.06. Management expects to continue to review the market
price of the Company's stock and repurchase shares as appropriate, with funds
coming from existing liquidity or borrowings under the RCF.
Management believes that the Company's cash and working capital at December
31, 1999, together with expected cash flows from operations and borrowing
capacity under the RCF, will be sufficient to satisfy its debt repayment
obligations, fund its anticipated capital expenditures and pursue additional
business growth opportunities for the foreseeable future.
Since the beginning of 2000, the Company has not had any interruptions
of its business due to the Year 2000 issue. During the next few months, the
Company will continue to monitor its operations and assess whether the Year
2000 issue has an impact on the Company.
Item 7. Financial Statements.
- ------- ---------------------
See "Index to Financial Statements" on page F-1 hereof.
Item 8.
- -------
Changes In and Disagreements With Accountants on Accounting and Financial
- --------------------------------------------------------------------------
Disclosure
- ----------
Not applicable.
19
<PAGE>
